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Rank: 6 of 133 NARRATIVE REPORT ON LUXEMBOURG PART 1: NARRATIVE REPORT Rank: 6 of 133 Overview and background How Secretive? The Grand Duchy of Luxembourg is ranked sixth in the 2020 Financial 55 Secrecy Index, based on a moderate secrecy score of 55 and a very large share of the market for offshore financial services, at over 12 per cent of the global total. Its position is largely unchanged since our 2015 and oderatey 0 to 25 2018 index. secretive Sandwiched between Germany, France and Belgium at the heart of Europe, this tiny constitutional monarchy has a population of just over six hundred thousand, allowing its enormous financial sector to achieve 25 to 50 a strong degree of ‘capture’ over the political system, media and culture of the entire Grand Duchy. Criticism of the sector, and discussion about its relationship to society, used to be exceedingly rare up until the LuxLeaks revelations in 2014, which helped to open up a wider public debate. 50 to 75 As in Switzerland and many other tax havens, the offshore financial sector has been underpinned by a history of political stability. This is bolstered by Luxembourg’s position at the geographical heart of Exceptionally secretive 75 to 100 Europe, catering largely to its immediate neighbours – and also its role as a founder member of the European Union.1 This latter factor has provided Luxembourg privileged access to the European market that other offshore centres cannot match; and Luxembourg also enjoys considerable political support from European economic élites who How big? 12.36% benefit from its offshore services. These factors have often protected it against being blacklisted or pressured to change. Until recently we were calling Luxembourg the “Death Star” of financial uge secrecy in Europe, due to its highly aggressive stance in fighting European transparency initiatives. Since 2013, however, Luxembourg has joined various international transparency initiatives and made significant improvements in its financial transparency. We attribute this relative change of heart above all to the evolving international arge climate on transparency, combined with high-profile global scandals that have cast the tax haven in a highly negative light. These changes also coincide with the departure of Prime Minister Jean-Claude Juncker, sma arguably the most important architect of the secretive modern tax haven. However, the tax haven was always nurtured and promoted by an élite consensus that goes far beyond Juncker, underlining the fact huge: >5% large: >1% to 5% small: >0.1% to 1% tiny <0.1% that external pressures are the core driver of change. Luxembourg accounts for 12.36 per cent of the global market for offshore financial services. This Despite these improvements, Luxembourg remains one of the world’s makes it a huge player compared to other secrecy most important secrecy jurisdictions, hosting a range of financial and jurisdictions. other activities that foster illegality or abuses elsewhere – including a high-security ‘freeport’ warehouse to store assets such as paintings, gold The ranking is based on a combination of its bars or bearer bonds, with ample opportunity for financial mischief.2 secrecy score and scale weighting. Full data is available here: http://www. A new unregulated investment fund for ‘well-informed’ investors financialsecrecyindex.com/database. (Reserved Alternative Investment Fund, or RAIF)3 has recently been To find out more about the Financial Secrecy launched which can be used to hold ‘tangible’ assets such as art or to Index, please visit 4 run hedge funds that are not subject to regulatory approval. Financial http://www.financialsecrecyindex.com. secrecy is based significantly on the privileged nature of professional The FSI project has received funding from the lawyer-client relationships, rather than classic Swiss-styled banking European Union’s Horizon 2020 research and secrecy. For instance, investors can hide behind Luxembourg companies innovation programme under grant agreement No 727145. © Tax Justice Network 2020 If you have any feedback or comments on this report, contact us at [email protected] 1 LUXEMBOURG whose officers are bound by these relationships not remains a centre of lax financial regulation, which to divulge details of who owns them. The Panama potentially poses global financial stability risks. Papers mentioned 400+ financial intermediaries in New initiatives to diversify the economy into the Luxembourg.5 information age,12 develop itself as a centre for green and ‘climate finance’13 and the exploitation of ‘Family offices’ manage private wealth across the outer space resources (yes, really) have yet to prove generations, and since 2007 a specific entity has themselves.14 been available for private wealth management, 1 the ‘family wealth management company’, which More broadly, Luxembourg is also one of the world’s is a passive investment vehicle for the acquisition, most important – and growing - offshore financial holding or sale of assets.6 As Deloitte Luxembourg centres, and its offerings go far beyond the provision Luxembourg,points out to its clients, it is free of all taxes a (except prime of secrecy – though domicile most of these sectors depend a minuscule subscription tax) and there is ‘no access quite heavily on offering regulatory escape from to tax treaties and European directives’.7 other countries’ rules. Luxembourg is the most for hedge funds important private banking and wealth management Luxembourg is the second largest home of funds centre in the Eurozone, with 143 banks holding after the US.8 A fund, if used by an individual or nearly 800 billion euros in assets,15 providing family, can potentially act as a wrapper to protect liquidity to their mostly foreign owners. Of these The Luxembourgagainst being identified as the Withbeneficial more thanowner 14,000assets, funds 350 billion is fiscalin the secretivestability privatehas attracted banking of the underlying assets and theand income about they USD 3,700sector bn of(up from 300hedge billion fund when managers we published from all Alternativeproduce. For Fund example, if a fund is incorporated as a 16 assets under managementthe 2015 as FSI), at andover more the thanworld. half As ofof privateJune 2015 Industry...company and opens a bank account, under current banking assets are owned by ‘ultra high net worth insufficient beneficial ownership identificationthe end of 2015, rules Luxembourgindividuals’ holdingis 15.6%over 20m of eurosglobal each. alternative It is the 1st Globalthe bank investment collects ownership informationthe second - used largestfor investmentworld’s second largestinvestment investment funds fund centre and 45% after automatic tax information exchange with other the United States17 – and fund management, with fund centre in Europe and fund centre in the world after of alternative UCITS were countries under the new OECD Commonthe United Reporting States andassets the under fastest management domiciled worth in nearly Luxembourg. 3.8 trillion worldStandard fastest – based growing on a 25% ownership threshold. If euros,18 is the most important part of the financial nobody holds that much, which is simplegrowing to arrange, alternative investment alternative domicile centre. Fanny Sergent, PwC Luxembourg then they may not be identified andfunds the information domicile. Hedge Fund Leader, January is not exchanged. Luxembourg also has a long history in hosting The legal and regulatoryinternational bonds;2016 it is a big player in insurance Luxembourg takes secrecy seriously:framework breaking that hasand been reinsurance; and in structured finance and professional secrecy can result in a prisoncreated sentence. over 9the years,securitisation vehicles. It is the world’s third largest 19 In January 2018 a welcome turn combinedof events saw with Luxembourg’scentre for the domicile of hedge funds, after the Antoine Deltour, one of the two the whistleblowers, Caymans and Delaware, and is growing fast at their who exposed the so-called “Luxleaks”longstanding scandal, economicexpense, and as this graph shows.20 have his conviction overturned while the conviction against his fellow whistleblower, Raphael Halet was upheld.10 More recently, the outgoing President of the Evolution of the worldwide share of hedge funds by domicile Luxembourg Bar cautioned that 45% the proposed transposition of the 2011 2012 2013 2014 Jun-15 th 6 EU Directive on Administrative 40% Cooperation (DAC6) was going too far by forcing tax lawyers to 35% 33.0% break their professional secrecy by 30% 26.7% forcing them to disclose abusive 24.8% 25% 11 22.8% tax avoidance constructs. 21.1% 20.8% 20% While Luxembourg has taken 15.6% 15% 12.7% action to improve its previously 10% 7.8% poor track record on providing 5.6% 6% offshore secrecy, it has continued 5% 3.2% to expand its role providing 0% letterbox companies to help Caymans Delaware BVI Ireland Luxembourg Others multinational corporations avoid paying tax in other countries. It Source: HFR 2 4 . PwC Luxembourg UXEMBOURG ECFIN CountryL Focus Issue 9 | December 2013 domestic clients' banking needs. During the Chart 2: Banks' country of origin 2008 financial crisis Luxembourg Only 5 out of participated in capital injections for ING, 141 banks are Fortis and Dexia because they were systemically considered systemically relevant. These relevant.Outside the traditionally-defined financial sector formally abandoning political neutrality and joining it also runs abanks lucrative were recapitalisedline in hosting with theholding help of
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